Jefferies' secret to Paying All-Cash Bonuses

You might want to work at Jefferies. While banks like Deutsche are imposing punitive deferrals on bonus payments this year, especially for senior staff, Jefferies has told staff it will be splashing cash and paying the entirety of this year's bonuses in instantly available ready money.

Jefferies' CEO Richard Handler and chairman Brian Friedman sent a memo announcing the decision this week. Handler and Friedmand said, “You can’t spend non-cash compensation or unpaid cash to buy a home, purchase groceries, invest in your life or help out friends and family,” reports Bloomberg.

Jefferies' all-cash policy is particularly appealing in view of its apparent generosity. For the first nine months of 2012, it accrued $334k in compensation per head - $7k per head more than Goldman Sachs did over the same period.

Jefferies didn't return requests for comment, but headhunters in London say the cash bonus policy applies as much in Europe as elsewhere. "Yes, Jefferies are paying cash bonuses in London," says one headhunter who works with Jefferies. "They're also still hiring," he adds, "but only in pockets."

How can Jefferies pay all cash bonuses when banks in Europe are governed by the European Union and FSA's rules specifying that 60% of bonuses for high earning code staff are deferred over three years? The answer lies in Jefferies' UK accounts. Its most recently available submission, for the year ending November 30th 2011, shows that Jefferies International - the company's UK-based business - had assets of only £25m.

This places Jefferies far below the level at which the FSA takes a serious interest in its pay structure, says Jon Terry, a partner in the reward and compensation practice at PWC. "Firms with less than £15bn in sterling assets are considered level 3 or 4 firms by the FSA. This means that they can do whatever they like in terms of deferring pay and paying in shares," says Terry.

We spoke to several ex-Jefferies staff who've left in the past few years and they said that cash payments have always been the norm at the firm, although deferrals were toyed with in 2008. "Jefferies were one of the last places to switch to deferred bonuses," says one former Jefferies employee. "I always got my bonus in cash, although some stock was introduced in 2008." Another senior banker, who left Jefferies this year, says that even when Jefferies deferred bonuses, it paid 90% of bonus packages in cash. "It was like night and day compared to other banks," he says, "there was always a very small percentage of deferred stock, which was one of the big advantages of working there."

In a sense, Jefferies is similar to other brokerage houses like Cantor Fitzgerald, the now defunct MF Global, or interdealer brokers like ICAP, where cash bonuses based on a commission-formula are standard. "Cash-based commission structures are very common in the brokerage world," says Simon Maughan, head of sector strategy at Olivetree Securities. However, the recently ex-senior employee we spoke to said Jefferies has been working hard to move away from commission-based formulae and wants to pay discretionary bonuses in the style of a bank.

The bad news about Jefferies' cash bonuses

Unfortunately, it isn't all good news about Jefferies' bonuses. As well as paying more cash, the bank is also said to be increasing its notice periods. It is also likely to be perpetuating last year's policy of clawing back already paid cash bonuses if employees voluntarily part company with Jefferies within one year of receiving them.

How can cash that's already hit employees' bank accounts be rescinded? Employment lawyers say anything is possible. "Well-drafted employment contracts will have a deductions clause," says Simon Gorham at law firm Taylor Wessing. "These will effectively say that if an employer has paid you money it should have, it will be able to retrieve it."

Clawbacks were in effect for Jefferies' cash bonuses in 2011. Nevertheless, people appear to have left voluntarily in London. The UK Financial Services Authority register shows 11 departures for other firms: Ian Williams went to BNP Paribas, Arlette Vargas-Ali went to Cantor, Joseph Nagae went to Blackstone, John Luck went to Numis, Hiba Larsson went to Dexia Capital, Christian Janssen went to Renshaw Bay, James Hill went to Lepe Partners, David Gill went to Liquid Capital, Elizabeth Dicioccio went to Mercury Capital and Tobias Clothier went to Aviate Global.

We spoke to several of Jefferies' recently departed employees and none of them said they'd had their 2011 bonuses clawed back, even though they'd left for competitors voluntarily.

The bad news about Jefferies in London

Before rushing to Jefferies for the sake of cash bonuses, it's worth noting that the bank isn't a big payer in London. In the year ending November 2011, its highest paid banker in London earned £700k - a lot, certainly, but not as much as its City rivals.

It's also worth noting that Jefferies isn't necessarily a great launch pad for a future career. Although 11 of Jefferies' London employees appear to have found roles elsewhere, the FSA register indicates that 61 people who've left the bank this year still haven't found new registered roles at other firms.